4 charts

Where challenger banks are headed, in 4 charts

  • Challenger banks have definitely managed to make a dent in consumers’ habits.
  • But with the current downturn in funding, what lies ahead for these digital banks?

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Where challenger banks are headed, in 4 charts

With layoffs and funding cuts, the economy has gone from grapes to raisins, and digital banks, it seems, are getting the shorter end of the stick.

Challenger banks’ survival has always been a bit of a question mark-y topic, but with the current downturn, the question of their future relevance has become even more pronounced.

Last month, CB Insights released its Challenger Bank Playbook, which looked at the current state and outlook of six digital banks, including Atom Bank, Monzo, Revolut, Starling, N26, and Tandem.

While digital banking has succeeded in reaching consumer habit-at, maintaining momentum is a whole other story.

From funding bumps to charterful versus charterless routes to success, here’s what’s in store for challenger banks, in four charts.

Has digital banks' funding fun ended?

Europe has seen its fair share of major challenger banks thus far, including Revolut, N26, Starling, Monzo, Atom Bank, and Tandem. As of 2014 and leading up to mid-November this year, these digital banks succeeded in getting over 37 million customers and raising over $6 billion.

This year, though, things have taken a turn in funding fun, with these challengers only raising $102 million as of November 3rd – their lowest ever since 2014. 

And then there are the things happening in the background, whether it’s Starling letting the public accounts committee know that over a third of the bounce back loans it approved during the pandemic are at risk of default, or Monzo’s numerous hiccups with regulations and banking rules. That and the fact that Monzo, Revolut and Starling have all been seeing an increase in scams this year.

Tough days for digital banking startups 

All startups are seeing a hit in funding right now, with global venture funding decreasing by 34% QoQ in Q3’22. And fintechs may have experienced the biggest slap of them all: in Q3 of this year, fintechs accounted for 17% of all tech funding – down from 25% in Q2’21. Banking-focused fintechs, meanwhile, raised $1.2 billion in Q3’22 – an 83% drop YoY.

You don’t need a charter to be popular

Still, there’s no question that digital banking has made it into consumers’ habits. Interestingly, the challenger banks that have seen the biggest growth in user base are the ones that didn't put focus early on on getting a charter, but rather on organic growth. Today, Revolut, N26 and Monzo have a collective user base of 34 million as of November this year. Starling, Tandem and Atom Bank, which did get chartered, have about a third of that.

The rise of embedded finance: what it means for challenger banks

That’s not to say that putting a focus on getting a charter is the wrong move for challenger banks. In fact, it may give them an edge over competitors.

This seems to be the case when looking at embedded finance, where there is growing interest. For challenger banks, offering banking-as-a-service products could be a viable new revenue stream. And in this case, challengers that took the time to get a banking license may have an edge, as they can offer a fuller suite of products.

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